Wednesday, 26 June 2019

Hong Kong Equity Issue

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The HK$2.86bn (US$370m) listing of Chinese snack food maker Zhou Hei Ya International showed that Hong Kong IPOs can still deliver a diverse shareholder roster and perform well in early trading.

Zhou Hei Ya resisted the temptation to lock away shares with cornerstone investors, and hired just three banks as bookrunners, taking a very different route to the majority of big deals during the year.

It may not have been the biggest deal of the year, but it was the city’s biggest listing during the review period without a cornerstone tranche.

Several investors had expressed keen interest in becoming cornerstones, meaning that they would have received a guaranteed allocation in exchange for an agreement to hold their IPO shares for at least six months. But Zhou Hei Ya, famous for its spicy dried duck snacks, decided not to sell a big chunk of shares to any particular investor in order to keep its modest-sized float as liquid as possible. Strong feedback during premarketing also boosted its confidence that cornerstones were unnecessary.

The deal did have strong support from anchor investors, who are free to sell immediately. The institutional book was covered on the first day of bookbuilding, and momentum continued to build as the management team met close to 180 global investors in six cities over seven days.

Books closed oversubscribed on November 4, just days before the US presidential election. Taking into consideration the cautious market sentiment and mindful that Hong Kong’s long settlement period would straddle the election, the company was relatively conservative in setting the final price.

Zhou Hei Ya sold 424m primary shares at HK$5.88 each, near the bottom of the indicative range of HK$5.80–$7.80. The final price represented a 2017 P/E of 14.5, a reasonable discount to the much bigger Uni-President China, its closest comparable, at around 20x forecast earnings at the time.

The shares were sold to more than 60 institutional investors, with the top 15 taking nearly 80% of the deal. The majority of the offering went to long-term, fundamental investors.

The cautious strategy panned out well. Despite the surprise outcome of the US presidential election, Zhou Hei Ya made a stellar trading debut on November 11. The stock closed at HK$6.67, 13.4% above the IPO price of HK$5.88, after rising as much as 16.3% at one point. The Hang Seng index fell 1.35% on the same day.

A slim syndicate structure also ensured there were no mixed messages to investors. Credit Suisse and Morgan Stanley were the joint sponsors and joint global coordinators. The pair were also joint bookrunners with China Merchants Securities.

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